Last week the government seemingly did a u-turn over the scrapping of the 10 pence rate of income tax, although it is far from clear what form the compensation will take for people on lower incomes who will lose out under the new tax regime.

It’s difficult to see how the government could have thought it a good idea to change taxes so that everyone gains except those who earn £15,000 or less a year, who will lose out by anything up to £150. This is obviously very unfair, and hits those people for whom £100–150 is a lot of money.

The desire to simplify the taxation system is a worthy one. However, removing one band of income tax wasn’t really the best place to start. What makes the tax system too complex is the system of tax credits, which is supposed to compensate people who have been failed by the system in the first place. Surely it would be far better to have a fairer base system of taxation, rather than having tax credits as corrections – which are so difficult to understand that millions of pounds go unclaimed each year. Unfortunately, the “compensation” which the government has promised people who have lost out following the abolition of the 10p rate will undoubtedly be yet another type of tax credit (if it materialises at all).

Perhaps a better solution would be to raise everyone’s tax-free personal allowance by £750. That would mean everyone would gain £150 that would otherwise have been paid in tax at the 20p rate. To recoup the loss in revenue, the government could lower the threshold at which the higher rate of tax is paid – the actuaries will have to figure out that one, as it requires knowledge of the distribution of salaries across the whole population. This solution would result in an equally simple system of tax thresholds (0, 20p, 40p) but be fairer in that those on the lowest incomes would pay a little less, and high-earners a little more.

As has been reported in the last week, people on low incomes would be hit hard by the abolition of the 10p starting rate of income tax. For those people, the loss of £100 or so per year is highly significant. Therefore, if they suddenly had to pay £10 per month simply for having a bank account, that would hit them just as hard. Yet that could be the result of the “crusade” against penalty charges. The result could be that people will be forced to close their bank accounts, dividing the population into two classes: those who can afford bank accounts, and those who can not. That seems far from fair.

It simply isn’t the case that people on low incomes currently pay penalty charges and those on higher incomes don’t. Many people on low incomes manage their money extremely carefully and avoid going overdrawn, just as their grandparents did before living off credit seemed the norm. It isn’t fair to penalise people just because others have been careless enough to incur account fees.

I still hope that a ruling against penalty charges by the Office of Fair Trading will not result in monthly account charges for everyone. However, if it does, we could see people on low incomes being hit just has hard as they have been by the abolition of the 10p income tax rate.

One response to “Income tax and bank charges”

Bank overdraft fees are becoming absolutely ridiculous. On my site, we get 4-5 people a day complaining about being unfairly charged. Bank of America has just agreed to now charges up to 10 overdraft fees per day at $39 a pop. Considering how they re-order transactions to optimize their fees, this is going to seriously hurt even more customers. Its time to stand up against these policies and demand change.